1. Qualification Guidelines and Credit Limits
FHA loans are backed by the Federal Housing Administration and are designed for borrowers with lower credit scores or smaller down payments. Conventional loans are not government-insured and carry stricter credit guidelines but offer more flexibility once equity is established. FHA allows scores down to 500 with 10% down, and 580 with 3.5% down.
2. Mortgage Insurance Structural Differences
Conventional loans charge PMI if down payment is under 20%, which can be cancelled once LTV drops to 80%. FHA loans charge both an upfront MIP fee (1.75% of the loan amount) and an annual MIP fee (typically 0.85%) that lasts for the entire loan life if your down payment was less than 10%, requiring a future refinance to remove it.
3. Loan Limits and Property Standards
Conventional loans adhere to loan limits set by Fannie Mae and Freddie Mac. FHA loans have regional limits that are generally lower than conventional limits, varying by county based on local housing markets. Additionally, FHA appraisals enforce strict safety, security, and habitability guidelines that the home must satisfy.
4. Long-Term Cost Analysis
While FHA loans often carry slightly lower nominal interest rates, their overall APR is typically higher due to the lifetime mortgage insurance premium. Conventional loans are generally more cost-effective over a 30-year period if you have the credit and down payment to qualify.